XYZ Ltd has drawn up the following budget for the year 2009–10:

(a) The General Manager suggests to reduce the selling price by 5% and expects to achieve an additional volume of 5%. A more-intensive manufacturing programme will involve additional costs of Rs. 5,000 for production planning. It will also be necessary to open an additional sales offi ce at the cost of Rs. 10,000 per annum.

(b) The Sales Manager, on the other hand, suggests to increase the selling price by 10% which is estimated to reduce the sales volume by 10%. At the same time, saving in manufacturing overheads and general overheads of Rs. 5,000 and Rs. 10,000, per annum, respectively, is expected on this reduced volume.
Which of these two proposals would you accept and why? Show the complete working.

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Rs. Raw materials 40,000 Labour and other variable costs 12,000 Fixed manufacturing overheads 14,000 Packing & Variable distribution cost 8,000 Fixed overheads including selling 6,000 80,000 Sales revenue @ 10 per unit 1,00,000 Budgeted profit 20,000